Helmerich and Payne Inc (HP) 2009 Q3 法說會逐字稿

Good day, and welcome to today's teleconference. At this time, all participants are in a listen-only mode. Later you will have the opportunity to ask questions during our Q&A session. Please note today's call may be recorded and it's my pleasure to turn today's conference over to Doug Fears. Please go ahead, sir.

Thank you, and good morning to everyone. Welcome to Helmerich & Payne's conference call and webcast to discuss the Company's third quarter earnings. With us today are Hans Helmerich, President and CEO; Executive Vice Presidents John Lindsay; and Alan Orr; and Juan Pablo Tardio, Director, Investor Relations. As you know and have heard before, much of the information provided today involves risk and uncertainties that could significantly impact expected results and that are discussed in our most recent 10-K and 10-Qs. We will also be making reference to such non-GAAP measures such as segment operating income and operating statistics. You may find the GAAP reconciliation comments and calculations on the last page of today's press release.

In that press release today we reported net income of just over $53 million or $0.50 per diluted share from operating revenues of approximately $388 million for the third quarter ended June 30, 2009. Included in that number is $0.01 of after tax gains from the sale of drilling equipment. No longer included in our quarterly income numbers is equity affiliate income. During last year's third quarter, though, net income was over $125 million, our $1.18 per diluted share which included approximately $0.05 per share of equity affiliate income. Also included in last year's third quarter number were about $0.13 per share from the sale of portfolio securities and drilling equipment and a charge of $0.07 per share from the end process research and development write-off corresponding to the acquisition of TerraVici Drilling Solutions.

As mentioned in the press release today, we recently completed the private placement of $200 million of senior unsecured 6.1% fixed rate notes due July, 2016. The Company will make five equal annual principal payments of $40 million each beginning on the third anniversary of the closing date of July 21. Those proceeds will be used to retire other debt and provide additional liquidity to help fund capital projects and other working capital needs. Given the new international projects announced today that John will discuss in just a minute and the potential shift in the timing of expenditures related to other capital projects, we could see our 2009 capital expenditures increase above the $850 million prison that we have discussed in previous webcasts.

During this past quarter capital expenditures were $212.5 million bringing the nine month capital expenditure total to $738.4 million. As we mentioned in our last webcast, we anticipate that during 2010 the Company will generate significant free cash flow as a result of continued income from our term contracted FlexRigs and the much smaller capital expenditure estimate for next year. We will be compiling a complete 2010 capital expenditure estimate during the month of August and will provide those numbers during our next conference call. And just as a note as of yesterday's closing the market value of the Company's holdings in Schlumberger and Atwood totaled approximately $268 million on a pretax basis or $170 million on an after tax basis.

As you saw in today's announcement, there has been progress made in Venezuela regarding our accounts receivable position principally as a result of the $48 million of US dollar equivalent collected since our last conference call at the end of April. Most of that amount was paid in believers, the local Venezuelan currency; as mentioned in this morning's release, the total invoice amount that remains pending by Petavasa is now approximately $97 million US equivalent, 80% of which or $78 million approximately is over 90 days old.

In our conversations with Petavasa our focus is now on receiving payments in US dollars. The Company is awaiting dollar proceeds that not only are due on accounts receivable balances, but also from two other previously disclosed sources. Approximately 75% of the $97 million receivable balance is payable in US dollars. As described in our recent 10-K and 10-Qs, the other two sources are pending conversions of our own believers to dollars that total approximately $67 million.

As previously announced, for both our second fiscal quarter and the third fiscal quarter just ended, we have chosen not to record Venezuela billings as revenue as we collect on those particular billings, we will record the revenue. As stated in the release, not the recognizing revenue in the Venezuelan operation had a negative impact of approximately $19.7 million for our third quarter operating results in our international land rig segment. Additionally, as mentioned in our last webcast, our effective tax rate is negatively affected by not recording billing revenues in Venezuela. Venezuelan taxes are computed on accrued revenue and income regardless of the Company's decision to go to a cash basis revenue recognition approach for US accounting purples. So while revenue is not recorded for GAAP purposes, we booked taxes based on Venezuelan tax rules. We estimate that the effective rate of 40.9% for the third fiscal quarter will be repeated for the fourth fiscal quarter, the effective tax rate, that is.

Operationally in Venezuela we now have nine rigs that have been stacked and two that are continuing to work with completion of the respective wells anticipated within the next six weeks. In the meantime we will continue to communicate with Petavasa in hopes that there will be continued progress in collections and conversion of local currency to dollars. We are hoping that sufficient progress will be made so that we can put rigs back to work there and continue operations in Venezuela. I would now like to turn the call over to Hans Helmerich, President and CEO and after Hans and John have made their comments we will open the call for questions. Hans?

Thanks, Doug. Good morning, everyone. We were reluctant to call bottom to the dramatic plunge in the US land industry rig count on our last quarterly call and, in fact, the rig count continued to drift downward until just only recently.

As we discussed then, the concern centered around the downward pressure on natural gas prices which since just a year ago have fallen by over 70%. Those worries remain as shale plays continue to contribute to brimming supplies as underground storage approaches capacity limits and faltering demand shows no real prospect of a short term turnaround. If someone back in September could have predicted that 1,000 rigs looking for gas would rapidly be idled, the reasonable assumption would have been that by now we might be seeing better prospects for improved gas pricing. That still needs to happen because clearly better natural gas prices represent the key driver for sustainable rig count recovery.

That said there are two powerful trends that bring encouragement to the big picture for us, gas depletion and the changing profile of the average gas well. In short depletion is approaching a 40% annualized rate and the average gas well more and more requires a drilling rig with advanced technology and performance capabilities. Even in an energy environment that is challenging as any that we've seen in the last 30 years, we can identify some so-called green shoots of encouragement. John will provide additional details on these items but just to quickly mention some.

We are encouraged that our US land fleet utilization seems to have stabilized. While all customers are cautious and many remain on the sidelines, the wholesale retreat has ceased. We see this as an opportunity to appeal to new customers who may not have tried a FlexRig before for lack of availability. Second, we are seeing additional opportunities in international markets. Here again one silver lining of having idle FlexRig is that we can provide international customers immediate access to best in class performance without waiting for a rig to roll out of our manufacturing effort. Our expansion into Mexico to work with Schlumberger on their IPM efforts is an example of the types of opportunities where the FlexRig performance is able to open new international markets going forward. As Doug mentioned, we're encouraged by the progress we're seeing in Venezuela with Petavasa's efforts to catch up on past payments both with us and other large service providers there.

Finally, we're encouraged to have initiated work with 17 new customers over the last nine months who for the first time are experiencing the capabilities of the FlexRig. We believe winning new customers speaks to a larger point of gaining market share in both good times and bad. Not long ago we were number five in terms of market share in the US land drilling business. Today while we still don't have the largest fleet, we have achieved the highest amount of drilled footage year-to-date in the domestic market. Excluding inactive rigs for which we are being paid, we have over 100 land rigs that are currently operating as compared to 93 mentioned by our largest competitor with a much larger fleet on their last call. The rest of our peers are even further behind on a percentage basis.

At the same time we've gained market share we've maintained premium margins compared to our peer group. We are now the US land industry's most profitable contractors. As the industry rig counts bottom, slowly recovers, we have no illusions about the challenging pricing environment that will follow. We anticipate that our peers will continue to discount day rates to protect their shrinking market share all the while promising something just as good as a FlexRig. Of course, our advantage is not only do we have the real FlexRig, but 80% of our fleet is made up of high performing rigs where the investment has already been made and where we continue to benefit from over 500 rig years of accumulated experience. Our strategy will continue to be to reduce the customer well cycle times and through a combination of performance, safety and responsiveness deliver value proposition that the customer embraces even in a very challenging environment. With those comments I'd like to turn it over to John to make additional comments.

Thank you, Hans, and good morning. In contrast to our last call in April, we are encouraged by the past several weeks of discussions with customers that they may be signaling a bottom in the rig count. Additionally, the spot market is beginning to emerge again in the US and we are actively bidding for projects, albeit primarily with smaller operators. There still isn't great confidence in gas prices but operators are beginning to high grade their fleets. We are hopeful that HP is able to pick up market share in the US and international because of current availability of FlexRigs and our track record of reducing our customers' well cycle times and delivering best values.

As I discussed the free operating segments, there are some improvements in the markets, but we're still in a very competitive environment. In our US land segment as of today, 113 existing US land rigs were contracted. Only 23 of the 113 contracted rigs are currently operating in the spot market including 19 FlexRigs. The remaining 90 active rigs including 82 new builds are under term contracts. Of the 82 new builds that remain under term contracts 74 are operating, seven are generating revenue due to requested delivery delays and one is in transition to its first location. Four of the 74 rigs that are operating are on reduced stand-by rates.

Excluding the four contracted rigs that are now assigned to our new international operation in Mexico, 95 land rigs remain idle in the US. I will give more details on the Mexico operation in a moment. The 95 stacked rigs consist of 62 FlexRigs and the other 33 are mobile and conventional rigs.

The number of active rigs during the third quarter averaged 102.2 as compared to 139.2 during the previous quarter. This does not include an average of approximately 4.2 rigs that generated revenue during the third fiscal quarter due to customer requested delivery delays. A cumulative total of 37 new build FlexRigs with term contracts have been early terminated since the beginning of fiscal 2009. However, only two terminations occurred during the last three months.

Revenue related to early terminations and customer requested new build delivery delays in the US totaled approximately $41 million during the third fiscal quarter, approximately half of which would have been earned during the quarter regardless of early terminations. The cumulative total for this type of revenue that was incurred during the first three quarters of fiscal 2009 is approximately $140 million. Additional revenue of approximately $70 million corresponding to early termination revenue and new build delivery delays is expected to be recognized after the third fiscal quarter. At this point we expect about 40% of this amount to favorably impact the Company's fourth fiscal quarter revenues and the rest during fiscal 2010. These future amounts may be reduced if some of these rigs return to work before the end of the original term contract expiration dates.

Since the peak last fall average spot pricing for H&P rigs in the stock market has declined by about 37% from the mid-20s to the mid-teens. The average revenue per day for rigs under term contract is expected to remain in the mid-20s. Currently the H&P day rate average for rigs in the spot market is approximately 35% lower than the H&P day rate average for rigs under term contracts. In US land the Company expects an average of approximately 91 rigs to remain under term contracts during the fourth fiscal quarter of 2009 and an approximate average of 80 rigs to remain under term contracts during all of fiscal 2010 unless, of course, customers early terminate additional contracts. These averages include the nine remaining new builds which are all under previously announced long term contracts and are now scheduled to be completed at the rate of one per month through April, 2010.

H&P's FlexRig technology advantage and footprint in all the major basins in the US allows us to be opportunistic and expand our market share. We're active in the Haynesville, the Woodford, Eagleford, Bakken, Barnett, and Marcellus for the first time according to rig data H&P has more active rigs working in US land than any of our competitors. This is in sharp contrast to 2001 where we had less than 4% market share and today we have over double that.

Our offshore operations held their own through the third quarter as we had anticipated activity would drop more quickly than it actually has. Average activity in the segment ended up averaging 93% for the third fiscal quarter. Today seven of the Company's nine offshore platform rigs are active. We expect one of the seven rigs that are currently active to be released in mid-August. Four of the six remaining rigs are expected to be active at reduced stand-by or move rates during portions of the fourth fiscal quarter. Consequently, the average daily rig margin for the fourth fiscal quarter is expected to sequentially decline by 5 to 10%.

We are receiving multiple bid requests for two of the stacked rigs and are hopeful the rigs will see activity sometime during the second fiscal quarter of 2010. In addition, we continue working with two platform rigs owned by customers under management contracts and are recommencing operations under a third management contract in Equatorial Guinea. In our international segment average international operating activity declined from 22.8 rigs during the second fiscal quarter to 17.6 rigs during the third quarter. 15 of the Company's international land rigs are now idle and without a contract including 9 of 11 in Venezuela, four of nine in Argentina, one of six in Colombia and one in Tunisia. 12 rigs are expected to remain active in the segment during the fourth quarter of '09 including five in Colombia, four in Ecuador and three in Argentina.

During the previous webcast we mentioned that two additional FlexRigs in Argentina were scheduled to begin operations in third fiscal quarter and yet we continue to wait on a location. In addition, one FlexRig is still in the US waiting for its first assignment. All three of these rigs are under long term contracts and will receive compensation for the delay in commencement of operations. As reported earlier today, the Company has entered into four two year term contracts with Schlumberger to provide drilling services on interproject management work in Mexico. Two of these four contracted rigs are expected to commence operations by the end of August and the remaining two rigs before the end of September.

Also reported earlier today was a letter of intent for day work drilling on a short term project in Africa providing an existing FlexRig. The rig is expected to commence operations during the first fiscal quarter of 2010. Thus the fourth fiscal quarter of 2009 and the first fiscal quarter of 2010 will be transitional periods. We would expect to see improvement during these two quarters in terms of the segment's bottom line. Nonetheless the segment may continue to report operating losses unless we make very good progress in terms of collections in Venezuela. Most importantly for future international expansion, however, is the remarkable level of field performance that our FlexRigs have delivered. A key driver in our ability to expand internationally is the current availability of FlexRigs in the US supported by the record drilling performance by FlexRigs in Colombia, Argentina, Tunisia, and of course in the US.

In closing, we continue to believe H&P is well postured for the long term both in the US and international markets. We expect a global trend of increasingly difficult wells defined by higher percentages of horizontal and directional wells with progressively longer laterals and smaller targets which will pressure the legacy fleet capabilities. Our customers have made it clear old conventional rigs are not capable of drilling these types of wells as efficiently as a FlexRig. Drilling contractors with better rigs and we think advanced technology FlexRigs have a huge advantage, should take market share. H&P is in a healthy position considering we have over 180 FlexRigs in the fleet with over 60 of those FlexRigs available in the spot market today. That gives H&P an edge when opportunities like we have described in Mexico and Africa arise. We can respond quickly and provide best in class performing rigs on strategically attractive projects. I'll turn the call back over to Doug.

Thank you, John. We'd now like to open the call to questions.

(Operator Instructions). We will go first to the site of Pierre Conner with Capital One. Your line is open. Please go ahead.

Thanks for taking the call -- question. Wondered if you could expand a little bit more on Mexico, two pieces of it. Are there future opportunities in the near term with some of the other IPM operators and then what can you bracket us around sort of rates or margins on those rigs?

Well, Pierre, hi, this is Hans. We'd love to be able to tell you all we could about that but as you know, it's one of the most attractive markets today and also very competitive and so we're restrained in what we can say both in terms of discretion and also in terms of our customer there, but, I will say that I do think the early work in all the big IPM players tended to look for the lowest possible price, but that often followed with less than best in class performance and I think as the whole field kind of steps back and says gosh, the opportunity here is really performance oriented and performance driven, then we're seeing much more interest and so that's very encouraging. So I think in the earlier work oftentimes the other services perform fine but the drilling rig was a point of bottleneck, if you will, and I believe all the players there are looking for how do we drive performance and to do that it gets back to having a high performing drilling rig, but, John, unless you want to add anything, I think we're constrained by talking very much about rates and anything else we haven't already disclosed on it.

Okay. No, I understand. I thought I'd try. Maybe on some other things, just some guidance. CapEx been for the year and some assumption of next year assuming no additional changes on international opportunities.

Want to respond to that?

This is Doug. For '09, Pierre, don't see it -- it's kind of hard to tell just because of some timing issues, probably won't exceed 900 aggregate or '09. Juan Pablo, have thoughts on 2010?

Well, we're still in the process of trying to prepare that, but as you can imagine, it's expected to be significantly lower than the 2009 number. I'm not sure how much more I can provide at this point.

Near just so the maintenance CapEx levels would run at what sort of maintenance CapEx out of that?

That would depend on the activity as you know, but we've thrown out a number of $100 million. That's probably a fair estimate in terms of a maintenance type CapEx.

Okay, all right. And then the last one is back to Hans on kind of a macro question about the upgrade into the fleet to expand a little bit more. We have seen a rig count increase, but it's all oily and my assumptions are they are shallow, small operators. There's some opportunities that I guess John mentioned up -- people upgrading their fleets, but, how much more inroads can you make if we're really drilling shallow oil wells, West Texas kind of thing?

Well, that's a fair question, Peter, but as you know from following us and I think it's reflected in picking up 17 new customers that haven't used the FlexRig, they're in some cases working the type of wells that you're describing and what they have found and what we've demonstrated clearly in the Permian Basin and South Texas and other areas where the work seems to fit a description of being more conventional, the outperformance is still a very important value proposition to the operator. So it doesn't require -- I think sometimes we get pegged for well, the FlexRig is great but you only need it when it's just a very difficult, very challenging well and we're on a very high number percentagewise of those types of wells, but what our customer is also seeing is just the day in day out performance is very suitable to the more bread and butter vertical drilling and it still drives an important value proposition. So I don't want you and your peers to think that well, we have to wait until, just the very most difficult drilling returns and comes back. I think what you'll see is that we get a disproportionate share of even this early phase of recovery.

Okay.

Pierre, might just give you an example of that. Hans outlined West Texas. As little as a year ago some of the wells we were drilling there I think they're in the 8,000 to 10,000-foot range that were 16 to 18 day well cycles and today with Flex 4M we're drilling those well and well cycle times six or seven days and, of course, as we said before, it's not all the rig. The rig is a catalyst for many other technologies to really enhance the drilling capabilities overall and those are straight holes. I mean those are vertical wells. They're not directional and so I think it does offer some expansion opportunities.

All right. Thanks, gentlemen.

Thank you.

Thank you. And we'll move next to the site of Mike Drickamer with Morgan Keegan. Your line is open. Please go ahead.

Hey, good morning, guys. I understand you can't say much about Mexico, but can you confirm that's just a straight day work contract, there's no other aspect there where you assume any kind of risk or anything?

No, we really can't confirm that. So yes, it's really back to we're just limited, Mike, in what we can say.

All right. I guess moving on, then, Doug talking about the funds you received from Petavasa, am I correct to assume that all debts flowed through the balance sheet, nothing went through the income statement?

That is correct. I believe, if any, it was just a small amount, was it not?

Yes. It was approximately only $3 million went through the income statement.

So kind of going forward, until you collect all this $97 million, everything goes through the balance sheet, correct?

Well, if we collect revenues that we did not book in the second and third fiscal quarter, as that cash is collected, then that's booked into revenue and income. The rest of it, all the billings up and through the first quarter of this year were booked as income and hit the receivable, hit the balance sheet. So you're going to get both types if we continue to get paid.

Okay. So that's really a matter of which invoice they choose to pay versus, you can't recognize anything until everything's collected?

Yes. It's really on the specific invoice type basis that we recognize their payments.

Okay, guys. Thanks a lot.

Thank you, Mike.

Thank you. And next we'll move to the site of John Daniel with Simmons & Company. Your line is open. Please go ahead.

Thank you. A couple for you guys. The first is you mentioned about the reduced stand-by rates on some of the idle but contracted rigs. Can you give us a sense as to what the difference is and the reason I ask is that one of your customers mentioned to me that they will be starting work on a few of their idle rigs in January. So just trying to see if all else being equal those margins would improve?

Essentially, John, we've said in the past our goal is to remain at present value neutral and that's what we're trying to do. I mean we've got a lower, an example, we've got a lower expenses and, that enables the day rate to be lowered obviously. We're just trying to maintain that net present value neutral position and it's really kind of all over the board because some rigs are with crews, some are without crews, but overall it's keeping us whole.

Keeping you even, okay.

Yes.

On the last call you mentioned that some of the FlexRigs down in Latin America were operating at I think it was 50% more efficient levels than some of the existing rigs in country, that is, your competitors reducing rigs. Given if that efficiency still holds why do you think the customers have been slow to start working down there on those other two, two rigs?

Well, I think in some cases the competitor rigs get laid down. I'll not going to go into any specifics as far as country, but I know of examples where multiple competitor rigs have been released and the FlexRigs are continuing to work. Now it's not, 100% related to the FlexRig coming up and in picking up all the additional work. Obviously a lot of that's market driven.

Right.

But there are examples where just as the same we have here in the states, that the older rigs get stacked and they don't go back to work and FlexRigs are replacing and in some cases you've got two rigs replacing, you know, three conventional rigs or in some cases even four conventional rigs. Again, I think it's the timing of having our FlexRigs starting up in South America is obviously coincidental with a big pullback. So I think as we begin to see operators high grade and look at picking up additional rigs we'll see that happen.

Have you had any of the customers down there talk about incremental FlexRig orders as you look out a year from now?

Yes, we have. I mean we've -- these things never move as quickly as we think they're going to but yes, I would suspect that, I wouldn't be surprised to see additional FlexRigs working in South America as well as other parts of the world. I think there's -- people are recognizing it and having FlexRigs available today in the spot market make a big difference.

Okay. And one final housekeeping one for Doug. On the private placement you just did, how much of that $200 million will be used for debt reduction?

Well, right now what we're doing is paying down some of the revolving debt. I think we put a little bit over $100 million to pay down revolving debt immediately and then there's $25 million coming due in August of the private placement we did in 2002 and then we have another 364 bank facilities, 364 day bank facility totaling $105 million that comes due in January. We'll pay that down.

Okay.

So that's -- and then like I said, just added liquidity.

Okay. That's it for me. Thank you very much.

Thank you.

Thanks.

Thank you. And we'll move next to the site of Mark Brown with Pritchard Capital Partners. Your line is open.

I was wondering if, based on your comments that you're starting to hear more and more inquiries from customers and spot market but at the same time the discussions previously on the call about high grading their fleet, where do you see the overall rig count trending over the next 6, 12, 18 months and are you saying you see that kind of flat where the complexion of the rig count changes to be more of the high end rigs but because they can replace three to four conventional rigs that the drilling capability is maintained?

Well, I think what you're suggesting, Mark, in your question is right, that there will be fewer rigs or there will be a downward pressure in this recovery because you have the kind of efficiency that you talked about. So that puts us in a good position. I can remember going back several years we always said we didn't need a rig count to go to 1,500 or 2,000 or 2,500, but we really felt the opportunity was in providing this business model of addressing the cycle times and value propositions. So we -- as we look forward, might we have a 1,200 rig count for a period of time before it improves? Yes. I think that's a real possibility. As I mentioned, you're still going to have to deal with the depletion rates and the average gas well that are real and then even the shale plays are very drilling centric, so they require lots of drilling and that puts even added emphasis on the efficiency and kind of gas factory approach, but I think what you're remembering from our earlier calls about this notion of people will move to high grading their fleet and the focus will be on performance and efficiency is still the right one.

Okay. And then just the 17 customers that have tried flex -- or new customers trying FlexRigs for the first time, what plays or what region of the countries are those in? Are they more in the shallow oil wells that you alluded to earlier or more in the shale plays?

It's primarily we've seen Haynesville, East Texas, Bakken, South Texas, the Marcellus. We've really seen a pretty good mix and again I think I pointed out earlier that a lot of this, was stressed towards upgrade and high grading rigs. So I think we'll have a chance to potentially see that happening, but it's all kinds of wells. It's difficult wells. Some of the wells are more plain Jane straight vertical work, but it's a situation where the customer has, either on the same lease with one of the customers we're working with and seeing their competitors times being much quicker and so obviously they want to get into that. In some cases they can't because they have longer term contracts that they have to wait until those contracts expire.

All right. Well, thank you very much.

Thank you.

Thank you. And we'll move next to the site of Waqar Syed with Tristone Capital. Your line is open. Please go ahead.

Good morning. A couple of questions. Now have there been instances where you are replacing your competitors high spec or hi-tech rigs?

Waqar, I can't sit here and tell you, I'm not going to say yes or no because I can't remember right off the top of my head. I remember getting some feedback over the last year or so where some competitors were struggling, but whether some of those rigs were early terminated and we replaced, I just -- I really can't tell you an exact example.

Okay. Second, there was some newspaper -- local newspapers in Venezuela reported that Petavasa and you guys have come to resolution and that some of your rigs could be going back to work shortly. Would you care to comment on that?

I think we said a lot about Venezuela already, Waqar, and we saw that article. I think the best characterization is we're making progress and we are hoping to see that progress continue and we have always said that that's a country that we have a great history in and would like to see things return to normal and go back to work, but I think at this stage we're still in the making progress part of the effort.

Okay. Would you need to be paid all $97 million to put another rig to work or at what stage do you say okay, you know what? I think we're on the right track. So let's go ahead and start putting some rigs back to work?

Well, we're probably not going to give a lot of granularity on that except to say, we've just said we need to be caught up. We need to be paid for the work we've performed and I think they're aware of our willingness and appetite to continue work, but really we've always said we need to be caught up.

Sure. And then how many rigs do you have in the Marcellus right now?

We have one that's currently operating, Waqar, and we've got several other deals that we're working on, but we have one that's been operating now I want to say for, 30 to 60 days, something like that. It's been a good startup. It's a FlexRig 3. We've got some opportunities I think for additional Flex 3's as well as the Flex 4S, the skid type rig. We've been encouraged by the early performance.

Okay. Now do you have to make any modifications to your -- the FlexRig 3's to make them -- to enable them to move easily between locations that have smaller loads or anything or is it pretty -- the same standard rig that you have in maybe Texas that can move there?

It's the same standard FlexRig 3. Now there are going to be some areas I would suspect whether it be in West Virginia or other areas and maybe even possibly in Pennsylvania -- we're in Pennsylvania now -- that you could possibly see some modifications of loads, but in the areas that we're working now and you can imagine the topography changes pretty dramatically from area to area, in the areas that we've been now it has not been a problem. We've seen very efficient rig moves and really haven't had to make any modifications. Obviously if you're taking your rig out of Texas or Louisiana, you're going to -- in some of these areas you're going need modifications in terms of winterization but as far as just mobilization, we haven't seen anything.

Okay. And then just the final question, do you have any early sense on what rig would be the preferred over the long term, the skid type or the normal rig?

In the Marcellus?

In the Marcellus, yes.

We said this all along. I really think that the offering we have, the FlexRig 3, the Flex 4S, the Flex 4M, the Super Single, I really -- what we've seen in our discussions is an application for all three of those rig types. It's kind of hard to say at this stage which one we would have the most of, but clearly the FlexRig 3 has been a model that has been accepted in really pretty much all the areas that we work.

Okay. Great. Thank you very much.

Thanks.

Thank you. (Operator Instructions). We will move next to the site of Joe Hill with Tudor Pickering. Please go ahead.

Good morning.

Good morning.

Hans, I think you said spot rates are running about 35% less than the contracted rates today?

Than the term.

Than our average contract, yes, that's right.

Okay. So if I kind of do a back of the envelope on that I'm thinking that looks like about 16,000?

Yes. That still is a little low, but in the range.

On average again we've got -- we've got a pretty wide range because of different application, rig types and needs but, the range today would be higher than that.

Okay. Okay. Thank you. And I know you don't really want to talk too much about the Schlumberger IPM work but could you tell us whether or not it's (inaudible) or somewhere else?

No. We can't identify that. I think the thing that -- and I don't know if Mike is still on the line, but I might have misunderstood his risk question and we're really not taking any -- or assuming any additional risks than we would have traditionally in other places we operate, but yes, we can't go into other contractual detail or even geographical detail.

Okay. So it's not a turnkey, then?

That's correct.

Okay. Great. That's it for me. Thanks.

Thank you.

Thank you and we'll move next to the site of Jason Zane with BMO Capital Markets. Your line is open. Please go ahead.

Hi. Just one quick question. I'm wondering where -- I know the rigs were recently idle, but before they were idle where were the rigs working that are going to Mexico?

I believe all of those were in Texas.

Okay. Great. Thanks very much.

Yes.

Thank you and we'll move next to the site of [Chase Moghill] with JPMorgan. Your line is open. Please go ahead.

Hey, guys, couple quick questions for you. Let's see, the 11 rigs that you have in Venezuela, what are the plans for those?

Well, we have said that those rigs are very well suited for the work they've been doing down there. They can -- we don't have any FlexRigs in Venezuela. Those tend to be the larger 2,000, 3,000-horsepower rigs and so, our hope is to kind get squared up and put those rigs back to work. So there's no plans today to move those rigs.

Okay. And then if you'd look at say the, turn to year-end 2010 and kind of looking at your potential international land market, kind of the mix between US and international, what kind of shift would you expect to see by then? I mean I know that you all are really pushing the FlexRigs internationally and just kind of wondering what kind of end roads that you all expect to make by then?

Well, it's a good question and what we have said before is when you look at the last three years where we had this great opportunity and this big growth ramp, the domestic market just had so much potential and you saw how well we did there, but the net effect of that was that it didn't provide us the same opportunity to grow our international business. So I guess the thing that we would say is the last three, three and a half years have not been a very good test of the attractiveness of the FlexRig or the potential of the FlexRig in international markets and I think the better test is what you set up in your question is well, what does it look like at the end of 2010? And I don't have a number or we've never really tried to make a hard goal of what percentage of the fleet do we want operating internationally.

If you go back several years, maybe 10, we had as many as half of our rigs in terms of top line revenue in international markets. One of the things that we point out is this is the first time we've really been able to go to international customers and provide immediate available rigs. I mean that's a two edged sword, of course, but it's a positive to them because we aren't saying hey, you have to get into our manufacturing queue. You have to wait until your rig's available and then you have to commit to three years. I mean we're looking aggressively to expand that footprint today. So I would be very disappointed if in your question the end of 2010 we haven't seen additional expansion. I think we will see that.

Okay. That's some great color. Thanks, guys. That's it for me.

Thank you.

Thank you. And we'll move next to the site of Robert Ford with Weiss Advisors. Your line is open. Please go ahead.

Hey, fellows.

Hey, Robert.

Of the $41 million of early contract termination revenue and delay penalty revenues you collected in the quarter, how much was termination revenue and how much was delay penalty revenue?

About 32 million, $33 million of that was early termination-related revenue. The rest was delay related.

Okay. How much of the delay related revenue do you expect to collect over the next quarter or two?

Well, of the $70 million that we have remaining for both comps, about 30% going forward beginning in the fourth fiscal quarter is related to delays and the rest -- excuse me, 70% is related to early termination and 30% is related to delays.

Okay. When did this delay -- this is the first I've heard of these delay penalty revenues. When did this first surface?

Well, I think, Robert, the theory has been we have wanted to cooperate and work with customers and accommodate, but at the same time with the starting point that we have a real long term contract and we have an obligation to investors and to our Board in making sure we capture the economic value of that. So part of -- as you know, I mean an early term provided that relief, but then also these delays provided some flexibility and relief, too but we were -- it was important to us to be compensated on a net present value for that contract. So to push it to the right we needed to see some associated cash to make that work for us.

Okay. And just the reason I bring it up, guys, is there's a perception out there today that you receive an extra $9 million of termination revenue that we didn't know about and so people are thinking they needed to back that out and that you're actually coming in light for the quarter, but in reality your early termination revenue was as expected?

No, that's right.

Okay. And then turning to Venezuela, I'm still a little confused about this one. We've collected $48 million since the last call, $3 million ran through the P&L for the third fiscal quarter. So do I expect $45 million to run through the P&L this quarter or only if you can turn it into dollars and repatriate it?

Robert, this is Doug. Just looking back, I'm not sure I totally understand your question, but I think you're trying to get a sense for proportionality of how much of the collection that is coming in future is going to hit the P&L.

Exactly and the timing.

And that's a hard number to give you. The answer is don't know exactly how that's going to flow. My guess, it's going to be generally high proportion of just balance sheet hit for a while and then, of course, these later billings that we've had over the last six months will come down the road. That would be my guess.

Okay.

And we saw the extreme of that this last one where we had a very small number, less than 10% that actually had to do with the last six months. So the more we collect I'm guessing that proportionality will change.

Okay. That's what I needed to know. Thanks, guys.

Thank you.

Thank you and we'll go to the site of Mike Drickamer with Morgan Keegan for a follow-up. Your line is open. Please go ahead.

I just want to follow up on the tax issue. You discussed how you're still accruing for taxes in Venezuela even though you are not accruing those revenues. Just for clarification purposes are you guys actually paying cash taxes in Venezuela right now?

I don't believe so, but it would be taxes that we would really owe. I think at the end of the day we will not be in a tax paying position in Venezuela. We just don't know that until year-end but in visiting and discussing that internally before, I think we're going to be pretty close to a nontaxable situation in Venezuela, but we'll see.

Now are you nontaxable because you haven't been paid or are you nontaxable for other reasons?

For other reasons.

Okay. Yes, can't imagine having to pay taxes on money they're not paying you.

Well, believe it or not that can happen. In Venezuela you can have just about anything happen, but that can happen, Mike.

All right. Thanks a lot.

Thank you. And we'll move to the site of Jamie Stone with Baron Capital. Your line is open. Please go ahead.

Hi. Good morning, guys. Going back to Venezuela, how much of the -- how much of your balances in Venezuela are over six months in arrears at this point?

Well, I think we said that 80% of the $97 million is over 90 days and I don't have the number just handy right now if you did over 60.

I know I asked over 180 days.

Oh, six months.

Six months.

I don't know that we have that handy.

I guess the reason I'm asking that is you got $45 million in this quarter that was prior -- that was revenues earned prior to the beginning of the second quarter.

That's correct.

And so I'm trying to understand how big is the remaining balance that is revenues that were earned prior to the second quarter and therefore, won't -- as you collect -- assuming you're likely to collect your oldest invoices first, that won't flow through the P&L and therefore, we've got to get another -- is it 30 million, 40 million, $50 million in before you really start seeing the 2Q, 3Q receivables come in? I know you can't time which invoices they pay, but assuming that you're negotiating stuff that was oldest first and moving forward, I'm just trying to get that sense because it seems like as you get into 2010 you may actually start to see a much bigger set of collections coming out of Venezuela related to the two 2Q/3Q than you saw in this last quarter? Or are likely to see in the current quarter.

We've got a group here guessing that there's probably $35 million of the $97 million that is connected with the last six or the last two quarters. Is that right? Isn't that what you're saying?

35 million to $40 million that would still be in receivables and that would be paid first and then whatever comes after that.

So if it's still receivables it's the revenue that was earned prior to the 2Q?

No.

We're going to have to get with you offline on that one.

Okay. But you understand what I'm trying to get to?

Well, you're trying to time the P&L hit.

Well, and I'm trying to understand how much is left in the receivable category because you haven't been booking anything for the last two quarters. So as of the balance sheet--?

How much is official receivables?

Both. I'm going to try and understand both of those things. I'll get with you offline and then the second question I had is of the money you've paid -- you've been paid this $48 million, are you currently sitting with all of that equivalent in Bolivars?

Most of all of that, yes, is in our Bolivars account.

Okay. And what is the likelihood of convertibility to dollars?

Good question. We're working on that and I don't have a sense and feel for that. Our hope is that it's high, but so far it's been a long time that we've applied for that and it just hasn't happened yet.

Okay. Thanks, guys. I'll catch you later.

Thank you.

Thank you and we'll return to the site of Mike Drickamer with Morgan Keegan for another follow-up. Your line is open. Please go ahead.

I'm sorry, but now I'm confused on the receivable issue and Venezuela as well. All of the $97 million should have been accrued prior to the second quarter, right, because you're not booking any revenues, so you're also not booking any receivables for what was earned during the second and third quarter, correct?

No, sir, that's not correct. The $97 million is what Petavasa owes us, but not all of that is on the accounts receivable books. Only those receivables that are left from prior to the second quarter of '09 is an official accounts receivable number.

Okay. So--?

And our folks here I think if I were to take a poll, they would say of that 97 million, there's about 35 million to $40 million that was actually on our books as receivables. The remainder of that, the other 45 million to $50 million, are the revenues of the second and third quarter that were not booked and therefore, did not show up on the booked receivables, but they still owe us.

Okay. That makes sense. I was confused on where you were referring to the total sum as receivables. I thought that was what came directly off the balance sheet line there?

Well, it can be very confusing, Mike. So I could have miscommunicated it, but I appreciate the question for clarity.

All right. Thank you.

Thank you. And it appears that we have no further questions in the queue at this time.

Thank you. We appreciate everybody joining us today. Our fiscal year earnings conference call is now scheduled for November 19, 2009. We hope that all of you will join us then. Thank you for joining us today. Have a good day.

This does conclude today's teleconference. Thank you for your participation. You may disconnect at any time and have a wonderful day.